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The Advantages of Using Binance Loans for Crypto-Backed Loans

Exchange

coincodex.com 25 August 2022 12:02, UTC
  
Reading time: ~6 m

Crypto-backed loans have become a popular tool among cryptocurrency investors. Crypto-backed loans enable users to hold on to avoid selling their cryptocurrency while still being able to obtain liquidity in another asset. For example, you could use your BTC as collateral to borrow stablecoins.

There’s quite a bit of competition when it comes to crypto-backed loans, with most major cryptocurrency exchanges and service providers offering such products. 

Binance, the world’s largest cryptocurrency exchange is no exception. They have developed a very strong crypto-backed lending service that provides unparalleled flexibility and low costs. In this article, we will be checking out some of the best aspects of the Binance Loans product, and also outline some of the key concepts you need to be familiar with if you want to use it.

Get Crypto-Backed Loans on Binance

The top 5 advantages of Binance Loans

Without further ado, let’s take a look at 5 of the best features offered by Binance Loans.

Flexibility

Binance Loans gives borrowers a lot of flexibility, as it’s possible to choose from 5 different loan durations.

  • 7 days
  • 14 days
  • 30 days
  • 90 days
  • 180 days

Even after the user selects a loan term and borrows assets, the loan can be repaid at any time with no additional penalties.

The flexibility also extends to the range of crypto assets supported for borrowing and providing collateral. Binance Loans can be used to borrow more than 160 different crypto assets, while more than 50 crypto assets can be used as collateral. This makes the product suitable for investors in “mainstream” crypto assets like Bitcoin and Ethereum, as well as those who prefer smaller altcoins.

You can use borrowed funds for whatever you want

Binance places no restrictions on what you can do with the funds you borrow through Binance Loans. You can choose to keep them on Binance and use them in the exchange’s trading and Earn projects, but you can also withdraw the funds to your personal cryptocurrency wallet and use them in DeFi protocols or for any other purpose. Binance Loans can therefore be used to take advantage of the numerous opportunities that arise in the markets or in the decentralized finance space.

Repay loans at any time with no penalties

As we’ve already mentioned, the crypto-backed loans offered by Binance Loans can be repaid at any time without any extra penalties. For example, let’s say you provide BTC as collateral to borrow USDT with a 30-day loan term. After five days you want to access your BTC again. You can simply repay the USDT loan and get the BTC back. The only interest you will be charged is the interest that has accumulated up to the point of repayment.  

Reduce interest payments with Loans Staking

When providing certain cryptocurrencies as collateral to take out a loan, you can reduce your interest rate through Loans Staking. The Loans Staking feature is offered for certain Proof-of-Stake cryptocurrencies. When you provide these coins as collateral, Binance stakes them and uses the proceeds from the staking rewards to offset the interest you have to pay.

You can see which collateral types support Loans Staking by the green checkmark followed by “Staking”. For example, you can see in the following example that we can reduce our interest rate to 0% if we provide AVAX as collateral. Since AVAX can be staked, Binance will stake the AVAX we provide and offset the interest payments.

Important things to know

The loans offered by Binance Loans are overcollateralized—that means that the value of the collateral you provide must be higher than the value of the funds you are borrowing. Cryptocurrencies tend to be highly volatile, and if the value of your collateral drops too much, the loan could be in danger of becoming undercollateralized. 

LTV and Liquidation

This is where the concept of LTV, or Loan-to-Value Ratio comes in. Simply put, the LTV tells you the ratio between the value of your collateral and the value of the loan. If your LTV increases too much, you will have to repay the loan or add more collateral if you want to avoid liquidation.

Meanwhile, the Initial LTV tells you how much you can borrow based on the amount of collateral you provide. For example, let’s say that we want to provide BTC as collateral to borrow USDT, and the loan has the following parameters:

  • Initial LTV: 65%
  • Margin Call: 75%
  • Liquidation LTV: 83%

If you provide $1,000 worth of BTC as collateral, you can borrow $650 worth of USDT. On Binance, the initial LTV will depend on the type of asset that you are using as collateral. In most cases, the initial LTV is set at 60% or 65%.

Your LTV will fluctuate throughout the duration of the loan. In simple terms, a lower LTV means a lower risk of liquidation. Let’s expand on our previous example. Let’s say that the price of BTC drops by 10% after we took out the loan and the BTC we provided as collateral is now worth $900. In this scenario, our LTV will increase to 72.2%. This is still lower than the margin Call LTV, which means that it’s not necessary to provide additional collateral at the moment. 

However, if the price of BTC falls lower and our LTV increases to 75%, we will receive a margin call. This means that Binance will remind us that we should provide additional collateral to reduce our LTV and avoid liquidation. 

If the price of BTC drops even further and our LTV reaches 83%, our collateral will be liquidated. When you’re in the process of taking out the loan, the system will inform you about the liquidation price. 

If the price of the asset you provided as collateral drops to this level, the system will liquidate the position by selling your collateral. You will still get to keep the borrowed funds in this scenario.

Interest

When it comes to lending, we always have to consider interest—this is the incentive for the lender to let you borrow funds. On Binance Loans, the interest you will have to pay on your loan is calculated on an hourly basis. You will see the interest rate before you loan funds. The interest rate will depend based on various factors such as the type of asset you are borrowing, as well as the loan term you have selected. You will be charged with the total interest accumulated during the loan after you repay the loan.

The bottom line

Binance Loans is one of the strongest crypto-backed loan products available on the market today. One of the product’s best features is flexibility, as it can be used to borrow a large amount of crypto assets, and also supports a wide variety of collateral types. The borrowed funds can be used for any purpose, which opens up access to a host of opportunities in the crypto space. Another very useful feature is Loans Staking, which can dramatically reduce or even eliminate the interest rate if you use certain Proof-of-Stake coins as collateral. 

Still, users need to keep in mind that crypto-backed loans are not risk-free and it is important to monitor your Loan-to-Value Ratio to avoid liquidation. 


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